Essential Austrian Economics: Economic Calculation
A key idea for the Austrian School is the importance of prices in making economic decisions,
Particularly for informing entrepreneurs and businesses of consumers' desires and
how best to produce these goods and services. The Austrians recognized the critical role
prices play to help people allocate limited resources efficiently, which benefits society.
Let's explore this idea with an example. How does an entrepreneur or business figure out
which combination of resources is best to make a product, say bicycles? The answer is prices.
Nick and Jenny are both bike manufacturers trying to decide what material to use for
the frame of their new mountain bike. There are many options that could work.
Jenny reviews the prices and calculates how each would affect the pricing of her new bike.
She decides aluminum is best given its price and qualities.
Nick ignores prices and instead decides on Platinum, because the company selling
it sounds cool – Titan Metals. However, platinum is more scarce
than aluminum and so it has a much higher price, which means Nick's bike is very expensive compared
to those offered by his competitors like Jenny. Jenny's choice of aluminum allows her to
easily keep up production with the demands of her customers.
Unfortunately, Nick's resource choice is also likely to disrupt other industries.
A nearby car manufacturer - who relies on platinum for its
engines - is forced to slow production because less platinum is now available.
With price information, Jenny makes a more informed choice about the resources she needs,
making it more likely her business will prosper - and the efficient use
of resources makes society better off since scarce resources are being used more wisely.